Masterfully Vague?

A busy day at the Department of Finance as desks get cleared before Christmas. The Department has released its regulations regarding the determination of long-term economic value for assets. These regulations formalise draft regulations that were released here in September. Much of this was published before. One new bit is that the September draft said that assets would be valued using a discount rate such that

“NAMA discount rate” means the Irish 10 year Government Bond rate at the establishment date plus * per cent;

Today’s regulations tell us what the mysterious * is:

“NAMA discount rate”, for bank assets denominated in euro, means the Irish 10-year Government Bond Irish Stock Exchange quoted closing yield at the establishment date plus 0.8 per cent;

For those unfamiliar with asset pricing formulae, the lower the discount rate used, the higher will be the estimate of the asset value. I always suspected that a low discount rate would be part of the NAMA pricing strategy. For instance, just before the draft NAMA legislation was released I wrote:

My point here is that it will be very easy for any NAMA official who wanted to do so, to pluck out an appropriate set of assumptions about the future that will end up delivering whatever haircut is deemed desirable. In particular, I suspect it is possible that the valuations will completely ignore the risk premium element in pricing these assets and will make highly positive assumptions about future cash flows.

Interestingly, the Department’s new best friend, Mr. Seelig from the IMF had suggested to the Department of Finance that they use market rates for property investments or adjust NAMA’s cost of capital to reflect the risks associated with the assets being acquired. The 0.8 percent adjustment is, by any reasonable assessment, well short of the appropriate risk adjustment.

Mr. Seelig would undoubtedly approve of the masterful vagueness of the rest of the document, which is full of stuff about NAMA taking into account “in such manner as it thinks fit, by reference to such of the following as it considers relevant” various factors, i.e. doing whatever the hell they feel like.

One bit I didn’t understand was the following. Having defined the NAMA discount rate, page 6 then states:

The standard discount rate that NAMA shall apply in the calculation of the long-term economic value of all bank assets shall be 2.75 per cent to provide for enforcement costs, and 0.25 per cent to provide for due diligence costs, incurred or likely to be incurred by NAMA over its lifetime in the discharge of its functions.

I couldn’t figure out when this rate would be applied rather than the NAMA discount rate defined above.